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We Haven’t Learned The Lessons Of The Financial Crisis

September 18, 2018 Blog

As we sit a few days past the ten-year anniversary of Lehman Brothers’ downfall on September 15, 2008, it is clear that Wall Street and investors have not learned the lessons of the financial crisis.

Following the bankruptcy of Lehman Brothers, the entire financial system was on the verge of failure.  A panic and contagion spread to Goldman Sachs, Morgan Stanley, Citigroup and Merrill Lynch, which needed a bailout and was eventually bought by Bank of America.

The stock market collapsed, with the Dow Jones Industrial Average eventually losing 54% of its value before hitting its low in March 2009. Investors’ fortunes were decimated and there were massive layoffs on Wall Street and Main Street.

Even money market funds were “breaking the buck,” meaning the net asset value of some money market funds had fallen beneath the floor price of $1.00.

“Investors, not knowing how interconnected the biggest financial players were, feared the entire global financial system could implode,” according to Bloomberg. “A decade later, amid signs of new asset bubbles, a big question is whether the steps taken after the crisis have made that system strong enough to withstand the next shock.”

In other words, what have we really learned in the past decade?

Let’s start with our government and policy makers.  Following the financial crisis in 2008, the U.S. Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which provided certain protections reining in excessive risk and leverage on Wall Street. The new law also provided investors with certain investment fraud protections.

Unfortunately, in the past several years, those protections have been rolled back and the Dodd-Frank Act eviscerated.

Rather than making it harder to invest in risky and opaque investments, Congress passed the JOBS Act, which allows smaller companies to issue stock with virtually no real financial disclosure to investors.

Stock brokers have continued to pitch risky and dangerous financial products to investors such as illiquid structured products, cryptocurrency products and private equity investments. And don’t forget Puerto Rico bonds and closed end funds.

While Wall Street’s leverage levels may have been reduced from 30 to 1 to perhaps 10 to 1, that is still a staggering number in the face of a  major financial event like a trade war, or an actual war.

Investors following advice from hard-charging, over-aggressive stock brokers have often used excessive levels of margin which increases the potential upside of investment returns but also adds to the risk. Another stock market crash could ruin those investors.

People say that history repeats itself. It likely will.  Unfortunately, it looks like Wall Street and investors may not have learned the lessons of the 2008 financial crisis.

Zamansky LLC is a New York law firm which represents investors in court and arbitration cases against securities brokerage firms and issuers.  The firm may represent investors in cases against companies mentioned in this blog.  Zamansky LLC also represents investors in arbitration cases against UBS and other brokerage firms regarding Puerto Rico bonds and UBS closed end bond funds and other investments.